Regional Banks Pull Back Above $25M: How Debt Funds Are Filling the Hotel Financing Gap

Written by:

Rudi Davis

Date:

02 Dec 2025

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The hotel financing landscape has quietly split into two distinct markets, with regional banks retreating from larger deals and debt funds aggressively filling the void, according to a capital markets expert tracking the shift.

Stephen Haase, Director of Capital Markets at Greysteel, says the division occurs around the $20-25 million transaction threshold, where regional banks’ conservative lending standards create financing gaps that debt funds are eager to exploit.

Regional banks have adopted a more cautious stance on deals above the $20–25 million range, Haase says. Their loan-to-cost limits typically fall below 55% for acquisitions, a level that often prevents many sponsors from advancing their projects.

The Debt Fund Opportunity

While regional banks have pulled back, debt funds have moved in the opposite direction, according to Haase. These alternative lenders are offering more aggressive terms and higher leverage ratios for hotel acquisitions, particularly on value-add plays.

Haase says debt funds remain highly aggressive, noting that some recent hotel acquisitions with modest value-add renovations have priced in the mid-300s over SOFR. This puts their terms well ahead of what traditional banks are currently offering, especially when combined with the higher leverage that many sponsors need to make deals viable.

He adds that these lenders conduct deep reviews of market fundamentals yet have still emerged as one of the most dependable capital sources in the sector. Their role has only grown in the past several months, as regional banks have adopted more conservative underwriting and pulled back from larger hotel transactions.

The Small Deal Sweet Spot

The financing bifurcation creates a clear advantage for smaller transactions, according to Haase. Deals under $20 million can still access traditional bank financing with reasonable terms.

Haase notes that smaller hotel deals remain attractive to traditional lenders, with transactions in the $10–20 million range still able to secure financing from a wide mix of local banks and credit unions. He says these institutions remain active as long as the property has stable in-place cash flow and borrowers keep leverage requests below roughly 65%, creating far more accessible terms than those available for larger acquisitions.

This creates an unusual market dynamic where mid-sized deals face the most challenging financing environment, caught between conservative regional bank standards and the minimum deal sizes that attract debt fund attention.

Why Regional Banks Stepped Back

The conservative stance from regional banks reflects broader risk management concerns in the hotel sector, according to Haase. Unlike debt funds that specialize in hospitality and can underwrite complex market dynamics, regional banks appear to be applying more generic commercial real estate standards to hotel deals.

Haase suggests that regional banks’ 55% loan-to-cost ceiling on larger deals reflects their discomfort with hotel market volatility rather than fundamental credit concerns. This conservative approach “tends to inhibit a lot of sponsors from being able to move forward,” particularly developers who are typically “asset rich, cash poor.”

The CMBS Alternative Problem

The financing gap isn’t being filled by CMBS markets either, according to Haase. While non-recourse CMBS financing remains available, pricing has become less competitive.

Haase says CMBS financing has become less appealing because pricing has widened beyond what many borrowers are willing to accept. He explains that all-in costs typically fall in the 7% to 7.5% range on an interest-only structure – manageable, but still about 100 basis points higher than comparable recourse debt options, making traditional CMBS executions harder to justify.

This pricing differential is driving borrowers toward recourse debt from alternative lenders rather than non-recourse CMBS financing, further concentrating hotel financing in the debt fund space.

Positive Lending Trends

Despite the regional bank pullback, Haase identifies some positive developments in hotel lending. Most notably, the elimination of depository requirements that had been common throughout 2024.

Banks’ depository requirements, which were widespread throughout 2024, had been a major hurdle in hotel financing. Haase says those conditions have eased in recent months, noting that most of the deals brought to lenders this year have not faced the same pressure to open or maintain deposit accounts.

The shift matters because those requirements effectively pushed leverage even lower. Haase points out that when developers were expected to bring an additional 5–10% deposit, loan-to-value ratios dropped to roughly 50% – a level that made many projects financially unworkable for sponsors.

Market Evolution Continues

The bifurcated lending market may represent a permanent shift rather than a temporary condition, based on Haase’s observations. Debt funds’ willingness to specialize in hotel market fundamentals and supply dynamics gives them a competitive advantage over generalist regional banks.

Some hotel operators have responded to the shifting debt landscape by creating their own credit arms, using lending as a way to generate returns without deploying additional equity. By leveraging their operational expertise, these groups can structure financing that reflects the realities of running a hotel, allowing them to offer more flexible and creative capital solutions than traditional lenders.

Whether regional banks will return to larger hotel deals or debt funds will continue to dominate the middle market may depend on how hotel fundamentals evolve and whether traditional lenders develop more sophisticated hospitality underwriting capabilities.